Innovation Canada: A Call to Action

Innovation Canada: A Call to ActionBudget 2008 announced $10 million in annualfunding to enable the CRA to implement anaction plan to improve the administration of theSR&ED program by increasing the agency’sscientific capacity and by improving its servicesto claimants (Department of Finance 2008,p. 87). Since then, CRA has undertaken severalinitiatives, some of which are still under way.For example, it has increased the number oftechnical reviewers who determine programeligibility and provide claimant services. TheCRA also provides First-Time Claimant, PreclaimProject Review and Account Executive services.These free services are demand-driven and areintended to improve claimants’ access to theprogram. 4 The Panel heard evidence fromstakeholders that CRA’s existing “pre-approval”service is not achieving its objective ofimproving the speed and predictability of theclaims process. One factor contributing to thisoutcome is that third-party preparers — whoare involved in more than half of all claims —may be reluctant to communicate to theirclients the availability of CRA’s free services.With its existing services, clients can obtain aninformal ruling on eligibility from CRA, whichcan be useful to firms seeking loans and usingtax credits as security. A formal ruling,particularly one that is available at any stage ofthe R&D process, would evidently be morevaluable to R&D performers and would reducethe incentive to make use of contingency feearrangements with third parties. A morepredictable eligibility determination processwould also reduce the current tension betweenCRA and taxpayers when projects aredetermined not to qualify ex post, whichsometimes imposes substantial costs on thecompany performing the R&D. In addition, theproposed labour base for the credit wouldremove a great deal of uncertainty for theCCPCs regarding qualifying expenditures.More Cost EffectiveAnalysis by the Department of Finance ofstart-ups created over the 2000–2004 periodindicates that, within five years followingincorporation, approximately 2 percent ofinnovative start-ups grow into large firms thatcontinue to undertake R&D. This outcomesuggests that the enhanced SR&ED tax credit isa blunt instrument for supporting the “gazelles”among the many start-ups that are eligible forthe enhanced SR&ED credit and that a shift inassistance for SMEs to other more targetedprograms could be more supportive and costeffective. Furthermore, calculation of the netpublic benefit undertaken for this reviewindicates that the SR&ED credit for smallcompanies likely does not generate a positivenet benefit because of the high subsidy rate andcompliance costs relative to the estimatedspillover benefit.The effectiveness of the SR&ED program wouldbe improved if its parameters could be adjustedto target more of the benefit toward those firmsthat have a greater probability of achieving highR&D-based growth and profitability. If theprogram were to adopt the proposed labourcost base set out in Recommendation 2.1, theprevailing 35-percent rate for small companieswould have to be increased to compensate forthe new narrower cost base of the tax credit.The Panel is not in a position to recommendnew rate parameters to be applied to the labourcost base. That will require considerabletechnical analysis, which is the purview of theDepartment of Finance. But it is evident that, inreadjusting the parameters, there is anopportunity to retarget the benefit. Specifically,the refundable portion of the credit for CCPCsshould be reduced over time so that a portionof the benefit would be claimed only if thecompany is profitable and therefore has taxowing against which the non-refundable4 More information on the services the CRA provides to SR&ED claimants is available from the CRA website at:http://www.cra-arc.gc.ca/txcrdt/sred-rsde/srvcs-eng.html.6-12